Reducing high-risk contracts yields mixed results

In March 2009, just shy of two months in office, President Barack Obama issued an executive memo signaling a decisive shift away from the contracting policies and trends of the previous decade.

The memo exhorted agencies to strive for fair and open competition and made clear the administration’s preference for fixed-price contracts as opposed to other more high-risk varieties. The Office of Management and Budget directed agencies to cut by a lofty 10 percent the share of new contract obligations spent on such high-risk contracts, which include cost-reimbursement, time-and-materials/labor hours (T&M/LH) and noncompetitive awards.

While some agencies made progress, governmentwide results were disappointing, according to a November 2011 Government Accountability Office report, barely moving the needle on reducing new high-risk contracts.

Despite the inconclusive results, contracting experts and agency procurement chiefs told Federal News Radio there is more to evaluating the effort to reduce high-risk contracts than the failure to reach the 10 percent goal. Perhaps most important, they said, the initiative was successful in raising awareness about the importance of matching the proper contract type with an agency’s mission.

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For these reasons, Federal News Radio believes more progress is needed on the Obama administration’s efforts to reduce high-risk and noncompeted contracts. The rating is part of our special weeklong multimedia series, The Obama Impact: Evaluating the Last Four Years. Throughout the series, Federal News Radio examines 23 different administration ideas and initiatives and ranks them as effective, ineffective or more progress needed.

Lofty goal went unmet

High-risk contractsThere are different categories of high-risk contracts.

Sole-source contracts Contracts awarded with little or no competition

Why they’re high-risk:Deny the government buyer the benefit of the open market to set prices

Cost-reimbursement contracts The government pays allowable costs and sometimes a fee (often related to performance)

Why they’re high-risk:Provide only a limited incentive for the contractor to keep costs down

Time-and-materials/labor hours (T&M/LH) Allow contractors to bill the government by the hour, which includes overhead and profit

Why they’re high-risk: No guarantee of a delivered product or service

In the decade before Obama took office, contract spending on high-risk contracts ballooned. Spending on sole-source or noncompeted contracts more than doubled, growing from $73 billion to $173 billion between fiscal 2000 and 2008. Spending on cost-reimbursement contracts rose from $71 billion in 2000 to $135 billion over the same time period, while spending on time-and-materials/labor hours (T&M/LH) contracts more than tripled — from $8 billion to $29 billion.

Such contracts are known as high-risk because they are the most prone to overspending — and the government is forced to shoulder most of the risk of cost overruns.

OMB told agencies to cut spending on new contracts that fell under any of those high-risk categories by 10 percent between 2009 and 2010.

In individual categories, agencies made some progress, reducing the percentage of dollars awarded in new T&M/LH contracts by 19 percent between 2009 and 2010, according to a July 2011 report from OMB. Additionally, more than half of the 24 largest agencies reduced their individual share of new spending in high-risk categories.

But governmentwide, the initiative posted only meager results, according to the GAO review of agencies’ efforts.

Specifically, its report found agencies cumulatively reduced the use of newly awarded high-risk contracts as a share of base contract spending by just 0.8 percent — falling far short of the ambitious 10 percent goal.

Disagreements over data

Nailing down definitive numbers is complex.

GAO said OMB’s reporting of the results of the overall acquisition savings initiatives was plagued by “inconsistent data sources and time frames, creating uncertainty about the actual outcome of agencies’ efforts.”

For example, halfway through the first year of the effort, OMB changed the baseline year against which progress would be measured, from 2008 to 2009.

Dan Gordon

GAO also noted issues with information entered into the Federal Procurement Data System, which the administration used to track the effort. Prior to 2010, if part of a contract was fixed-price and another portion was cost-reimbursement, for example, the agency could label it a “combination” contract in FPDS. But GAO and OMB disagreed over how to allocate these contracts into the various high-risk categories.

However, Dan Gordon, former administrator of the Office of Federal Procurement Policy, said evaluating the success of the initiative shouldn’t hinge solely on the failure of agencies to meet the 10 percent goal.

“My view is always that it’s more important to keep the pressure up to reduce the use of uncompeted contracts and time-and-materials rather than focusing on particular ways of counting,” Gordon, now associate dean for government procurement at George Washington University Law School, told Federal News Radio. “I think that the focus on methodology for counting is considerably less important than the focus on reducing the use of these high-risk contracts.”

Did 10 percent goal ‘miss the point?’

Why the reduction of high-risk contracts was rated More Progress Needed

Experts agreed the failure to hit the 10 percent goal doesn’t necessarily represent the entire portrait of the effort to reduce high-risk contracts. In fact, looking only at the decrease of new contracting obligations may mask the actual progress agencies made.

That’s because cost-reimbursement and time-and-materials are lumped together in the high-risk category, even though, Gordon said, the latter is far riskier to the government.

In that sense, the reduction goal “can actually miss the point,” Gordon said, “because shifting from T&M to cost-reimbursement can reduce the government’s risk, but of course you don’t get any credit for it.”

In fact, there’s evidence to support that many agencies found themselves in such a Catch-22. Between 2009 and 2010, the overall share of spending on cost-reimbursement contracts — one of the high-risk categories agencies were supposed to reduce — in fact increased by 2 percent.

But what initially looks like another missed goal may be a sign of prudent progress.

“I think if there had been a dramatic decrease in the use of cost-reimbursement contracts, that actually might have made me nervous,” Gordon said, because it would be a sign of agencies transitioning contracts to fixed-price without thought for their actual requirements. “You don’t want a 10 percent goal to drive stupid behavior.”

That’s because, in some cases, cost-reimbursement contracts can actually reduce risk to the government.

Stan Soloway “If I have a contract with high risks associated with it and lots of unknowns, the bidder, whoever it may be … has no choice but to build into their bid [that risk] and that uncertainty,” said Stan Soloway, president and CEO of the Professional Services Council, a group that represents contractors.

Soloway and others said the emphasis should be on matching work to the proper contract, not a blanket policy to shift work to fixed-price vehicles.

“Senior people told me constantly that in the 1980s, the push for fixed-price contracts led to stupid fixed-price contracts,” Gordon said. For example, it would be foolhardy to insist on contracting for open-ended research and development work using a fixed-price contract, he explained.

In his estimation, Soloway said the focus on reducing high-risk contracts, at first, seemed poised to head down that route.

“In the near term, we saw more and more work pushed into the fixed-price environment, even when it might not make sense,” he said. “But to the extent it has tailed off, I think it’s not a question of attention to high-risk contracts tailing off. I think it’s people beginning to sort of right the ship; it’s almost like a pendulum swing, bringing it back to center.”

Gordon said the last thing OMB would want is for agencies to shoehorn work into particular contracting vehicles to arbitrarily meet the objective.

“I think it’s useful to have a numerical goal, as long as the numerical goal isn’t viewed in such a rigid way that doing something stupid to meet the goal is viewed as smart,” he said. “We wanted our contracting officers, our acquisition workforce, to be empowered to push for what makes sense for the government.”

Agencies take balanced approach

Individual agencies often found what made sense was taking a more nuanced approach to managing high-risk contracts.

NASA heavily invests in research and high-stakes development of untested technologies. Thus, an overwhelming majority of work the agency performs is done via cost-reimbursement contracts — 79 percent, a number that stayed relatively constant between 2009 and 2010.

Bill McNally

Bill McNally, assistant administrator in NASA’s Office of Procurement, said the goal at his agency is more of a balanced approach — not only to reduce high-risk contracts because, in many cases, that’s not a realistic goal for the agency’s work, but to focus on properly managing them.

NASA’s missions often are high-risk, McNally said. “So, we’re not going to go off and dramatically start doing firm, fixed-price contract on high-risk missions that are hard to define and hard to specifically do a thorough estimate,” he said.

The Interior Department had nearly the opposite problem: So much of its work was already done through fixed-price contracting — nearly 70 percent in 2009, when the initiative was launched.

“But we did find that once we put some additional focus on it, we were able to make improvements in an area where we hadn’t realized we had that much opportunity available to us,” said Debra Sonderman, director of Interior’s Office of Acquisition and Property Management.

Debra Sonderman Interior took a multipronged approach to reducing high-risk contracts and increasing the number of contracts awarded competitively.

Interior made reducing high-risk contracts an area on which senior executives would be rated in their performance reviews, Sonderman said, much as they’re held to account for increasing small-business contracting. Some component bureaus instituted contract-review boards, and during the 2009 Recovery Act, non-fixed-price contracts had to be approved by Sonderman’s office in order to move forward.

“That became an incentive for people to stop and think, ‘Do I really want to have to go all the way to the department to get this thing approved?'” Sonderman recalled. “And so we saw people really changing their attitude that maybe a fixed-price contract would work for them.”

Those efforts helped Interior slash by 10 percent spending on contracting obligations in all the high-risk categories OMB measured, according to data on Performance.gov. In 2009, for example, time-and-materials contracts represented 17 percent of Interior’s obligations. By 2010, it was 13 percent.

“What we found was that even though we initially said, ‘Why do we have to pay attention to this small thing?’ when we really got into looking at it, it was clear that there was some opportunity,” Sonderman said.

In its report, GAO hinted at an uncertain future for the initiative. OFPP officials told the auditors the focus going forward would shift to a new goal to reduce spending on management-support services contracts.

However, in the most recent AcqStat reviews OFPP held with agencies this summer, high-risk reduction remained on the agenda.

Francis Rose is the host of In Depth, which airs weekdays from 4-7 p.m. on 1500 AM in the Washington, DC metro area and online everywhere. Francis has covered all three branches of the federal government as a broadcast journalist since 1998. He joined Federal News Radio in 2006, and launched In Depth in 2008 as a daily show focused on connecting federal executives to the information they need to do their jobs better.